It is clear to see that the popularity of EdTech investments is rising for Venture Capitalists, you can read more about the USPs of an EdTech company in our previous blog post, “What do VCs look for in an EdTech solution?”.

As a follow on, we are now going to review what a VC should consider before investing in an EdTech company.

What problem is the company solving?

COVID-19 presented several challenges within the education industry and EdTech companies were able to provide short term, cost effective solutions to overcome these challenges. However, the challenges highlighted a longer term need for improvement in Technology across the Education sector.

There are many problems that an EdTech company may be working to solve, from access to high level teaching, bringing interactive VR learning into the classroom or integrating the use of AI. The key factor to consider here is that the EdTech company you are reviewing is clear on their niche, the problem they are looking to solve and how their offering supports education professionals to overcome the specific challenge.

Without this niche, EdTech companies will struggle to find their place in the market and schools, parents and students won’t see the need to engage with them. However with this niche, the opportunities to support the Education industry, and most importantly, the students, are endless.

Do they have a robust cash flow model in place?

The management of a business’s finance is key, in fact, it’s fundamental to the success or failure of the business. A robust cash flow model ensures that the EdTech company owners have knowledge of future cash flow requirements. 

The benefits of having a robust cash flow model are vast, including that it allows a VC to learn more about the business, identify where there are potential funding gaps and allows for appropriate cash collection targets to be set.

It is also key to consider the cash flow forecast, having an accurate forecast in place allows the business to be more in control of their ongoing cash position, ensure suppliers are met (avoiding any issues with maintaining credit terms) and keeping this forecast updated allows decisions to be made based on actual performance.

Is their business model sound?

Whilst all EdTech businesses will have a key mission that benefits the end user, the business also needs to have a clear aim to increase/sustain profits, grow revenue and decrease costs. Before investing in a business, VCs need to be able to evidence a sound business model that generates profitable revenue from repeat customers.

Key things to consider when reviewing a business model include the value offered. The more value an EdTech company can provide their end user, the higher chance that they will return to you and therefore, allow you to generate repeat business and recurring revenue. In addition to this, it is also important to ensure that the model takes into account the market potential. Some of the questions we would expect an EdTech business to know the answers to are; who will pay for this service? Who has bought similar services in the past? What feedback has come from professional networks? What feedback has come from customised consumer research? Who are your key competitions? What potential is there to gain market share?

Whilst we are on the topic of competitors, it is always useful to know what similar businesses offer so that you can offer more, or unique, services. This allows an EdTech business to gain a competitive advantage over other competing organisations. Factors that can provide this in the EdTech spare are better performance, a wider range of features offered or something that has not been seen or done before.

We would also expect a EdTech business seeking investment to have a clear vision of who their ideal customer is. This includes knowing their characteristics, qualities and values. Knowing this is one thing though, they must have also put this into practice to ensure the product or service they have created meets their customer’s tastes and preferences. Without this, they won’t see any recurring revenue.

How do they compare in a competitive market?

Having reviewed the market as part of their business model, the EdTech business should already be able to provide VCs with a solid overview and comparison of their offering vs other competitors. However, before investing, individuals may still wish to complete their own research to see how the business truly compares.

Here are some of the key competitive factors VCs may wish to compare; products and services offered, pricing, positioning, branding and market reputation. VCs will want to compare the strengths and weaknesses of the EdTech business they’re looking to invest in alongside it’s key competitors. They will want to see that the business has identified their competitive advantage.

Is the business scalable?

Another key factor is the scalability of the business, by this stage, VCs will have identified a clear opportunity for repeat business and recurring revenue. Now they will look to consider how this can be developed and scaled whilst still maintaining profit margins. This is key to ensuring that they get their initial investment back!

The idea of scalability has become more relevant in recent years as technology has made it easier to acquire customers and expand markets, resulting in the need to scale quicker. When looking at scalability, VCs will be looking to see how the business would meet the demands of an increased workload or market demand. The key question a VC should be asking is; “Would the business be able to ramp up production and delivery quickly enough to meet the need?”.

EdTech companies (in fact, technology companies as a whole) tend to be far easier to scale as they have low operating overheads and little to no burden of warehousing and/or inventory, therefore, they don’t need a lot of resources or infrastructure to grow rapidly.